Spring meetings of the International Monetary Fund's board of
governors are usually unmomentous affairs.
[caption id="attachment_57375" align="alignright" width="300"
caption="IMF building, Washington D.C."]
The big IMF annual meeting draws the world financial elite every
fall to eat quality hors d' oeuvres and fret expensively about
the dire times ahead. The spring follow-up is generally dry and
administrative with a lot of unfathomable rhetoric about
Not so this year. At the spring confab this past weekend, IMF
director Christine Lagarde, that telegenic six-foot French lady you
may have noticed from time to time, pulled off a
financial-diplomatic coup by squeezing $430 billion more in
emergency funds out of the 100-plus countries that are members of
But the real news was who gave the money - the four BRIC
countries and probably some other emerging markets - and who is
likely to use it: sputtering, debt-logged European nations.
This amounts to an historical turnabout that investors,
particularly U.S. investors isolated by their two vast oceans, do
not quite get yet: The big emerging market states are the ones on
solid economic and, with some caveats, political grounds, at the
The developed world is staring into the abyss with bond
investors eyeing the exits and national leaders falling like
dominoes. Two more European governments shook over the past two
days as Netherlands Prime Minister Mark Rutte resigned with his
whole cabinet, and French president Nicolas Sarkozy seemed headed
to defeat based on first-round election results.
The IMF was founded after World War II, originally to stabilize
currency exchange rates with market interventions. Its mandate
greatly expanded during the Latin debt crisis of the 1980s. The
Fund became lender of last resort to bankrupt and near-bankrupt
As a funding pre-condition it aggressively pushed them toward
the "Washington consensus," a menu of fiscal austerity and
so-called structural reforms designed by the rich Western world
ostensibly for the benefit of its errant emerging brothers.
President Hosni Mubarak of Egypt got off one of his few good comic
lines when he dubbed the IMF the "International Misery Fund."
Yet the IMF medicine worked eventually, by and large. Long-time
shaky creditors like Brazil, Russia and Turkey slashed expenditures
and built budgetary and currency surpluses. China and India pared
their massive bureaucracies (structural reform) and unleashed
vertiginous growth. Currencies prone to adding zeroes in the past
now have to be checked because of their market strength.
The rich countries who prescribed these tough remedies neglected
to treat themselves however.
Fast forward to 2012. Broad swathes of Europe are eyeing
international financial hand-outs. Former supplicants from the
emerging markets have cash to put into the kitty. The donor list
for that $430 billion Lagarde just raised is formally a secret.
But some elementary arithmetic indicates a big contribution from
the developing world. European states themselves put up a reported
$200 billion, Japan $60 billion more. The U.S. demurred, officially
on the grounds that Europe can dig its own way out of its debt
That leaves a hefty $170 billion unaccounted for. Most of it
likely came from the BRIC nations, who are not specifying any
numbers but are vocally grumbling about taking a few of Europe's
eight existing seats on the IMF's 24-member board of directors.
Indian Finance Minister Pranab Mukherjee said he "presumed" his
country, China, Russia and Brazil "will contribute to increase the
fund on fulfillment of certain conditions."
What all this means for investors is that one big element of
presumed emerging markets risk - the so-called sovereign risk that
bonds will default, currencies blow up, and governments collapse
without much warning - is increasingly a thing of the past.
The big developing countries proved more resilient on these
macro indicators (currency possibly excepted) than the developed
world after the 2008 crisis, and investors were rewarded by
tremendous gains in their securities in 2009-10.
A second form of peril, the "governance risk" that derives from
lower-quality regulation, more corruption and less transparency in
emerging markets is alive and well. A case in point is today's
crash in the shares of Wal-Mart de Mexico
), the local subsidiary of the American retailing colossus, after a
New York Times
expose on the chain's entrenched pattern of bribing Mexican
officials - and U.S. executives' pattern of covering it up. But
that is another story.